Despite a big leap in HECS-HELP debt reducing borrowing power for thousands of university students, mortgage broker Bass Tawil said it was the perfect time for brokers to add value.
Tawil (pictured above), principal mortgage broker at iCare Finance, said while he felt for borrowers facing a cost-of-living crisis, “it’s not all doom and gloom”.
“As mortgage brokers, we do have the privilege of a large panel of lenders that allow us to rest on their different Income and debt policies,” Tawil said. “So, we might find that with one lender we can reach a certain capacity which will reach the clients objectives.”
Student loan holders were stung by increasing costs when HECS-HELP debt was indexed at 7.1%, coming into effect on June 1. This figure was much higher than the 3.9% in 2022 and typical annual increases of around 2%.
Canstar found the average pre-indexation higher education debt of $24,771 could cut a solo buyer’s borrowing power by as much as $57,000 to $315,000 if they were on an average income of $94,000.
But while the indexation meant the average student debt bill would rise by over $1,700, Tawil said having the debt in the first place affected borrowing capacity.
“In my experience, it’s not commonly understood among borrowers that it’s someone’s income that determines how much of their HECS affects their borrowing power,” he said.
The repayment rate of HECS debt is tied to the borrower’s “repayment threshold” or their income before tax.
For example, if a borrower’s annual income is below $48,361 before tax they will pay 0.0%, while a borrower with an annual income of $141,848 and above will repay 10% of their income towards their debt, according to the ATO’s tax calculator.
“Where the large index rate of 7.1% comes into play is that it just means that it will take people longer to pay off their HECS,” Tawil said.
Finding options for client objectives
Over three million people have student debt, according the ATO, making HECS repayments a significant issue for many current and potential clients of brokerages.
Tawil said it was easy for borrowers to become too focused on repaying their student debt before looking at other options.
“Especially for first time buyers, which are typically the clients who do have those HECS debts, we do like to recommend that they explore the options of the first home owners grants, first home loan deposit schemes that are out there and also to take advantage of the stamp duty concessions and exemption thresholds in their state,” he said.
However, Tawil said he was aware that many of these schemes reduced the options for lending.
“Not all lenders are part of those government schemes,” he said. “As brokers, we do gravitate towards those lenders if we feel that it’s going to meet the clients’ objectives of homeownership and take advantage of smaller deposits, for example.”
Giving advice to clients without overstepping the mark
With a Finder survey showing 54% of Australians concerned about HECS repayments and 14% believing they will never pay off the debt, it’s natural for clients to come to mortgage brokers for advice.
However, Tawil said it was important to iron out any blurred lines from the outset and make a distinction between lending advice and financial advice.
“A lot of us are frontline when it comes to financial questions and we can always give general advice around how it will impact their borrowing capacity and have the client make a decision based off that,” Tawil said.
“But I wouldn’t be so quick to advise specifically to everybody that putting all their savings into reducing their HECS is the is the best option.”
Tawil said brokers should warn their clients that it was not a “one-size-fits-all approach” and encourage them to consider the advice of a financial adviser.
“There are situations where the applicant might be on the cusp of getting approval and can pay off their HECS debt, and I find lenders are happy to approve if they provide evidence of closing the amount,” he said.
“I have also heard some conflicting strategies where some people might choose to invest some of that money as opposed to putting it to HECS and they might get a bit of a return on it.”
Tawil said it was often better for clients to pay down other debt first, such as
personal loans, credit cards, and BNPL, rather than to focus on HECS.
“While it’s a good idea to pay it down, it will be a better idea to look at your situation holistically from the point of view of multiple advisors.”
